EV/EBIT: meaning, formula and how it compares with EV/EBITDA

Investors use many ratios to judge whether a company looks cheap or expensive. EV/EBIT is one that looks at operating profit after the cost of wear and tear on assets. This page explains what EV/EBIT means, how to calculate it and when it is more useful than EV/EBITDA.

Quick answer

EV/EBIT is a valuation multiple that divides a company's enterprise value (EV) by its earnings before interest and tax (EBIT). It shows how many times its operating profit the market values the whole business at. Because EBIT subtracts depreciation and amortisation, EV/EBIT gives a fuller picture than EV/EBITDA for companies that must keep spending on equipment and assets.

Key takeaways

• The ratio is enterprise value divided by EBIT.
• EBIT is operating profit after depreciation and amortisation.
• It suits asset-heavy businesses better than EV/EBITDA.
• It is not affected by how a company is financed.
• Its inverse, EBIT/EV, is called earnings yield.

What is the EV/EBIT multiple?

Enterprise value is the value of the whole business: market value of equity plus debt, minus cash. EBIT is earnings before interest and tax, which is profit from operations after subtracting depreciation and amortisation but before interest and tax.

Dividing enterprise value by EBIT shows how many years of current operating profit the market is paying for the business. A lower multiple suggests a cheaper valuation, all else being equal.

How is it calculated?

In this example, the same company looks cheaper on EV/EBITDA than on EV/EBIT, because depreciation is a real cost for this business. The figures are only for illustration.

EV/EBIT vs EV/EBITDA

EV/EBITDA ignores depreciation, which can make capital-heavy companies, such as telecom, steel or manufacturing, look cheaper than they are. These businesses must keep spending to replace machinery and networks, so depreciation reflects a real economic cost.

The EBIT-based ratio includes that cost, so it is often a better measure for comparing companies with different levels of capital spending. EV/EBITDA can still be useful for comparing firms with very different depreciation policies or recent large investments.

Why use enterprise value instead of price?

The P/E ratio uses net profit, which is affected by interest costs and so by how much debt a company has. Enterprise value multiples look at the business before financing choices, which makes companies with different debt levels easier to compare.

The inverse of this multiple, EBIT divided by EV, is called earnings yield. It is one of the two measures used in the magic formula investing method.

What are the limits?

EBIT can include one-time items, so analysts often adjust it. It also ignores tax differences between companies and does not reflect growth on its own. A low multiple may simply mean the market expects profits to fall.

For banks and financial companies, enterprise value multiples are rarely used, because debt is part of their core business. Price to book is more common for them.

Frequently Asked Questions